When a business owner makes plans for their estate, the family of the business owner might find themselves not a part of the owner’s plan for the succession of the business. While this might be well and good, it might also lead to disputes about how the business is treated and how the estate benefits from what happens to it. A great example of this type of situation can be found in a recent decision from the Court of Appeal for Ontario.

The Will

The deceased owned an auto supply company (“the business”). In his Will, he included a provision granting a long-term employee the option to purchase the business. The provision allowed the employee to exercise the option to purchase the business for the lesser of $1.75 million of “the price determined by multiplying the earnings of (the business) (averaged over the last three fiscal periods) by a factor of 5.5.” The Will also provided that the purchase price be delivered by way of a promissory note, with interest payable at 5% per annum. The employee would then be required to make a gross annual payment to the estate of not less than $180,000 to be made in monthly payments. The employee was also required to secure the promissory note with a general security against the company’s assets as well as through the registration of a collateral mortgage against the employee’s home.

Purchasing the Business

The employee attempted to exercise his option to purchase the business, but was unable to reach an agreement with the estate. An application judge ended up providing directions, setting the price at $529,611, which included a discount following what the judge determined to be an improper payment of $187,310 from the company to the deceased’s widow. The judge also determined that the employee was not obligated to provide a collateral mortgage.

The Appeal

The estate appealed the judge’s decision on the grounds that:

  • the judge treated the respondent as a beneficiary instead of a favoured purchaser;
  • the judge dispensed with the requirement of a collateral mortgage;
  • the judge accepted the respondent’s evidence regarding the amount to be credited for (the deceased’s) salary for the purposes of calculating earnings; and
  • the judge deducted from the purchase price monies paid out of the company to the estate.

The Appeals Court did not side with the estate on any of the grounds of appeal. It determined the judge made no suggestion that the employee was a beneficiary rather than a favoured purchaser. The Court found that since the employee did not own a home, and the Will was vague when describing this condition, there was no other direction available. The Court also agreed with the judge’s determination on the issues of salary and inappropriate payments to the deceased’s widow.

If you are considering filing an application to challenge a Will, contact the estates lawyers at Derfel Estates Law before you proceed. We can help you determine whether you are eligible to bring such a claim, can help you understand your options and rights, and can represent you throughout the challenge process. Call us at 416-847-3580 or contact us online to schedule a consultation.